Digital business models have become more common with the advance of digitalization. A digital business model is one that makes use of data encoding technology (binary-digit data encoding technology) to aid its operations including the production and supply of goods and services of digital nature. Four of the most widely used digital business models are; online e-commerce marketplace, sale of user-related data and digital content, online user-targeted advertising, and online transactions involving the supply of non-digital goods paid using a digital payment method.
All digital business models involve digital economic transactions that are either tax disruptive or non-tax disruptive in nature. For purposes of identifying what business models are tax disruptive, the effects of a digital economic transaction carried out in a digital business model are examined to see whether there is a need for special tax treatment. All models that require special tax treatment to be taxed effectively are categorized as tax-disruptive digital business models. They make use of the elements of digital content and digital distribution. On the other hand, digital business models that do not require any special tax treatment are non-tax disruptive in nature. These businesses normally utilize only digital communication and the digital payment elements of a digital economy.
Tax disruptive digital business models pose risks and challenges to tax revenue performance in Zambia. To begin with, online marketplaces that serve as trading platforms beyond merely linking buyers to physical goods pose challenges to tax collection. When dealing with local or resident suppliers, the challenge is more on taxing activities where there is no physical presence. It even becomes more difficult when dealing with non-resident suppliers. Enforceability of tax collection may become nonexistent. For example, it is not easy to collect taxes from digital platform operators who link the sellers and buyers through their platforms that are not domiciled in Zambia. Moreover, tax enforcement is only possible where taxing rights are recognized. Non-resident suppliers raise the question of how taxing rights should be allocated. Thus, how the income generated by the broker on Amazon or eBay is liable for taxation in Zambia is contentious even though Zambia does in fact provide the market for such operations.
Furthermore, monitoring volumes of digital content is difficult when dealing with models that utilize the sale of user-related data and digital content. Without an accurate assessment of volumes transacted, profits that are declared by suppliers can be underreported without ever being verified. The other challenge of digital business models relates to business registration. Digital content suppliers may operate without any physical space which makes it easy for them to operate without registration and hence easily evade paying taxes. For foreign suppliers of digital content, even if business registration is done in their respective jurisdictions, there is no incentive for them to register for Value Added Tax (VAT) with the Zambia Revenue Authority (ZRA). Even if they did, there would be limited options for enforcing remittances to ZRA on foreign suppliers.
Online user-targeted advertising business models also raise a challenge similar to that under the sale of digital content. The nexus of taxation with the market country still remains disputed and not clear. Online user-targeting advertising companies such as Facebook which is also widely used in Zambia claim that there are no input additions that can be claimed by market countries because the companies merely utilize information provided by users from the market countries in exchange for the services provided by the company to users. Thus, all revenues generated by the companies are retained and only liable for taxation in their home countries.
Many of the challenges and risks of digital business models on tax revenues are generated from the inherent nature of digital business models. The lack of physical presence and intangible nature of the goods transacted implies that traditional tax rules may no longer apply. Dealing with these challenges and risks require a set of interventions both at the national and international level. At the national level, more efforts have to be made to ensure that digital businesses are registered. Also, while tracking digital content is not easy, the government can work with the Zambia Information and Communications Technology Agency (ZICTA) to track digital economic activities. Financial institutions also play a critical role in dealing with the enforcement problem and monitoring digital activities via digital payment methods. Unfortunately, there is a tendency for financial institutions to be reluctant in working with the government on such matters. More however needs to be done at the international level with countries collaborating and mutually reaching agreements on issues around taxing rights.
Ibrahim Kamara (Mr)
Zambia Tax Platform Coordinator